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Increasing GST: not worth the effort?

The Grattan Institute has just released a report suggesting that the government should get more revenue from the GST, either by broadening the base to include food, health and education (yielding an extra $17 billion) or by raising the rate to 15 per cent (yielding an extra $27 billion). As you’d expect from Grattan, the analysis is sound and careful. As long as you accept the standard framing of the tax reform debate, in terms of the need to shift from direct to indirect taxation, it is reasonably convincing.

Grattan suggest using 30 per cent of the extra revenue to increase welfare payments and 30 per cent in cutting the bottom two tax rates, thereby compensating low income earners. The overview concludes:

Around 40 per cent of the additional revenue from a higher GST would be left over after welfare increases and tax cuts. At least some will need to go to state governments to help them address their looming hospital funding gap, as the price for their support of the change. This would leave a little – but not much – to reduce the Commonwealth’s budget deficit, or to pay for other tax cuts that promote economic growth.

(emphasis added).

Is that enough to sell the package? I can’t imagine the states going along with a deal like this for less than 20 per cent of the total extra revenue, which implies the Feds are left with 20 per cent, somewhere between $3.5 and $5.5 billion. From a political viewpoint, it’s hard to see this being worth the effort for the Turnbull government, especially with no guarantee of success.

As a comparison, the FBT concession for motor vehicles, reinstated by Tony Abbott costs the budget around $1.5 billion. Exemptions for non-profits, which have been comprehensively rorted, cost at least as much. Add in a few ‘rats and mice” concessions, and the Federal government would have as much as it could get, in net terms, from the Grattan package (Getting rid of the non-profit concession would probably require some compensating expenditure, but the same is true of the health and education concessions under the GST.)

That’s before we get to the elephants: superannuation concessions (also supported by the Grattan report), corporate tax avoidance, land tax and higher income taxes for (say) the top 5 per cent of income earners (reflecting elite opinion, the Grattan report suggests cutting these rates). All of these are hard, but not obviously harder than the GST.

So, why is GST reform at the top of the government’s list? The answer is simple enough. The advocates of reform haven’t had a new idea, on taxation or anything else, in 30 years. They didn’t get the GST out of Keating’s Tax Summit in 1984 and they didn’t get the version they wanted from Howard and Costello in 2000. So, the same old idea keeps on coming up.

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30 thoughts on “Increasing GST: not worth the effort?”

I don’t mean that non-profits should be compensated individually according to their past exploitation of the FBT rort. Just that some of the money saved by removing the exemption would probably need to be given back to the sector in increased general funding.

As I said, the same kind of issue will arise of health and education expenditure is included in the GST base.

Depending on their income levels, ‘newer’ public servants would more likely receive compensation in the form of tax cuts

You were right about military pensions still being indexed to the cpi and thus automatically compensated for a GST-caused jump in the cpi. However, not all of public service super benefits is protected from arbitrary jumps in the cpi. The PSS member contributions and earnings don’t have the same protection. (I haven’t checked if the same applies to military members contributions.) Also, if a public servant chooses to take some of their benefit as a lump sum then there is no cpi protection for that.

So even public servants don’t get complete compensation for their benefit. Even for unfunded PSS pensions (which have no contributions tax), there is no income tax for pensions below $35,480 (because of the 10% rebate) so compensation simply through income tax reductions is not possible.

Of course, public servants are in the luxurious position of receiving cpi-indexed pensions for a large part of their benefit. No such luxury accrues to the vast majority of people with a superannuation benefit who are basically screwed by an increase in GST.

There was an article in the paper yesterday about GST scenarios raised in a report for the Turnbull government, with one proposing a rise to 15% and inclusion of more things like education and healthcare.

I think if a rise in the consumption tax was based on the rationale that consumption in Australia is generally too high, then that would be a more positive reason for the tax increase.

If that was the case, then perhaps there could be different classes of consumption taxes, so, for instance, services could be taxed at a lower rate than manufactured goods.

Wealthy property owners just love GST and its increase. GST increase increases the value of buildings on their land. A GST increase also means the government yet again puts off applying an economic rent tax to the capital gain on their land, a profit that they receive through other people’s effort.

higher income taxes for (say) the top 5 per cent of income earners

That’s OK on the face of it but it’s not much good if those top 5 per cent of income earners can still make use of the inefficient tax lurks of negative gearing and superannuation. I’d say there’s much better value for political effort in attacking those tax lurks before attempting to get a higher marginal tax rate out of them. It’s also worth bearing in mind that negative gearing enables the well-off to acquire economic rents through buying property. As if one wrong wasn’t enough.